Lecture 3


Motivating questions

How do we know what we know? That is certainly one question to motivate your readings of the evolution of top incomes. … or may it is two: what do we know? how do we know it?

More specifically ask yourself:

What are the relative advantages and disadvantages of survey and of administrative data for the study of inequality at the top?

What are the major patterns in the evolution of top income shares, including the mixture of capital income and earned income, but also the patterns of shares both over time and across countries?

What are the drivers of the share of top income going to the top? How do they make sense of the facts, and what testable hypotheses do they generate?

The last question is particularly important because the challenge of theory is to inform our understanding of not just the causes within a particular country like the United States, but also of the differences between countries. Sherwin Rosen’s model of “superstars” is an important starting point, and you need to understand its workings, but need also to understand some of the institutions, like performance pay, that determine earnings at the top in country-specific ways.

Download the Lecture 3 slides.

Main readings

Stone, Chad, Danilo Trisi, Arloc Sherman, and Jennifer Betr n (2020). “A Guide to Statistics on Historical Trends in Income Inequality.” Center on Budget and Policy Priorities, Policy Futures. Available at: https://t.co/TXTLZtYsnp .

Atkinson, Anthony B., Thomas Piketty, and Emmanuel Saez (2011). “Top Incomes in the Long Run of History.Journal of Economic Literature. 49 (1): 3-71.

Piketty, Thomas, and Emmanuel Saez (2003). “Income Inequality in the United States, 1913-1998.The Quarterly Journal of Economics. 118 (1): 1–39.

Rosen, Sherwin (1981). “The Economics of Superstars.” American Economic Review. 71(5): 845-58.

Lemieux, Thomas, W. Bentley MacLeod, and Daniel Parent (2009). “Performance Pay and Inequality.” Quarterly Journal of Economics. 124(1): 1–49.

Readings for student led discussion

Kaplan, Steven N. and Joshua Rauh (2010). “Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?Review of Financial Studies. 23 (3): 1004-1050.

Bivens, Josh and Lawerence Mishel (2013). “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes.” Journal of Economic Perspectives. 27 (3): 57–78.

Mankiw, N Gregory (2013). “Defending the One Percent.” Journal of Economic Perspectives. 27 (3): 21-34.